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Competition for Google AdWords. A P EEP 142 4/13/06. Company Overview. incorporated in 1998 stock valuation over $100 billion $6.1 billion revenue in 2005 $1.5 billion accounting profits in 2005. Two main advertising programs. AdWords

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company overview
Company Overview
  • incorporated in 1998
  • stock valuation over $100 billion
  • $6.1 billion revenue in 2005
  • $1.5 billion accounting profits in 2005
two main advertising programs
Two main advertising programs
  • AdWords
    • Ads on search results pages, either above “organic listings” in a gray box or on the side of the page
    • Targeted to keywords searched
  • AdSense
    • Ads appearing on other websites
    • Generates $2.7 billion/year, but site host keeps about 80%
adwords basic policies
AdWords basic policies
  • Custom, local, regional, national and international view options
  • Cost-per-click (CPC) and cost-per-thousand views (CPM) options
  • Time-of-day options
  • $5.00 to start advertising; no minimum monthly bill
adwords pricing and placement
AdWords pricing and placement
  • Advertiser sets a cost-per-click max anywhere from $0.01 to $100.00
  • Advertiser sets a daily max to control costs
  • Electronic auction: “smart pricing” model automatically sets bid 1¢ higher than nearest rival
  • Max cost-per-click and “quality score” determines position on list
quality score and placement
“Quality score” and placement
  • Quality score is a function of:
    • Max cost-per-click bid
    • Click-through rate
    • Relevancy of ad text to user’s keyword search
  • Advertisers want high quality scores because:
    • Quality scores determine list order
    • Users are more likely to click on ads at the top
    • Ads below the top seven often won’t appear on the first page
how google maximizes adwords revenue
How Google maximizes AdWords revenue
  • Total revenue-per-page:
    • TR = Σ(pi*qi)
    • q1 = # of clicks on a given ad
    • p1 = $ per click on that ad
    • Google maximizes revenue by charging high p to the ads with high q through “quality”-based placement

(People are more likely to click on links at the top, and are more likely to click on links relevant to their search)

    • Firms compete for top spots, raising p
perfect price discrimination
Perfect price discrimination?
  • No, because advertiser is only charged its exact willingness to pay when another firm is actively competing for the same spot
    • Knowledgeable advertisers can get good results with relatively low cost keywords
  • Also, presence and intensity of competition varies by geographic location of the user’s IP address
advertisers shady behavior
Advertisers’ shady behavior
  • Using rival’s trademarks
    • Generally legal in the U.S. to use rival’s trademarks in metatext (code invisible to user), but illegal to use rival’s trademarks in ad text visible to user.
    • Example: another insurance company using “Geico” as a keyword, benefiting from Geico’s broadcast media ads
    • As yet, no definitive court cases on trademark use in unseen code
more shady behavior
More shady behavior
  • Raising rivals’ costs:
    • Using software that clicks on rivals’ ads and makes it look like each click is coming from a different computer
    • Hiring low-wage workers in other countries to click on rivals’ ads
    • Google writes code that identifies simple click-fraud operations, and sometimes issues refunds to advertisers
  • Google tries to maximize AdWords revenue by offering many options and letting competition for placement drive up prices
  • Google’s auction system absorbs consumer surplus for competitive keywords, varying by user’s location
  • Some advertisers try to use rivals’ trademarks or raise rivals’ costs